When it comes to IRS tax debt none of the typical debt collection rules apply. The IRS has power to take your money and lien your home without even filing a lawsuit.
This is much different than the standard unsecured debt (i.e. credit cards, medical, etc.). Normally, when a debt goes unpaid if the creditor wants to be able to garnish your wages, levy your bank account, or lien your home they must first file a lawsuit which will provide you the opportunity to respond and defend yourself. Only if you lose and a court enters judgment again you do you face the creditor actually being able to take your stuff.
Not so with the IRS. If you owe tax debt the IRS can garnish wages, levy bank accounts, and lien your home and don’t need a judgment to do so.
They will give you plenty of notice of what their intentions are, however if you find yourself with serious tax debt no amount of time may be enough to get things taken care of.
Owing the IRS money can lead to many sleepless nights. In this article I am going to provide you with four ways to eliminate your IRS tax debt.
1. Work with the IRS on an Installment Plan
If you owe less than $50,000 in tax debt to the IRS and have filed all required tax returns it can be fairly simple to set up a payment plan to get caught up. You can go to the IRS website and apply for an installment agreement that will give you up to 72 months to pay your tax debt in full.
While entering into an installment agreement can be pretty straightforward, there can be drawbacks. For instance, penalties and interest continue to accrue on your tax debt – often in the 8% to 10% range. Further, if you miss a payment or if you don’t file your required tax returns the IRS can revoke your settlement agreement.
If you owe more than $50,000 but less than $100,000 you can still negotiate an installment agreement with the IRS but you will not be able to it through the process.
2. Submit an Offer in Compromise to the IRS
While the installment plan will work for many tax debt situations, it does require payment in full and for many who owe a large debt to the IRS it may not be feasible to make a monthly plan payment large enough to get the debt paid off.
The IRS does have a process known as “offer in compromise” where the IRS agrees to take less (sometimes significantly less) if the IRS believes that it is unlikely that they are going to be able to collect the tax debt.
In order for the IRS to approve your offer in compromise there are two requirements that your offer must meet: first, your offer must be at least as much as the liquidation value of your assets, and second, you must offer an amount equal to your disposable earnings over the next one to two years.
Value of Your Assets
First, you must offer an amount equal to the liquidation value of all of your assets. When determining what the value of your assets the IRS uses a quick sale value which is about 80% of the what your assets could be liquidated for.
For example, let’s say you have an ATV that could be sold on Craigslist for $1,500. For purposes of the offer in compromise the asset would be valued at 80% of $1,500, or $1,200.
The offer that is submitted to the IRS must be at least as much as the liquidation value of all of your assets less any debt that is owed on the asset (like a car payment) and less any exemption the law allows you.
In addition to the liquidation value of your assets, you must pay an amount equal to your total excess income over 48 months (if you plan on paying your offer in a lump sum) or over 60 months if you plan on paying your offer over a two year period.
“Excess income” is determined based upon your answers completed in Form 433. This form provides for your monthly expenses and income and helps you determine what your excess income is.
Once you have determined the liquidation value of your assets and what your excess income is based upon Form 433 you are prepared to make your offer. A cash offer is an offer that can be paid out in a lump sum shortly after acceptance by the IRS. The following is an example of how a cash offer would be calculated:
Let’s say you owed $75,000 in IRS tax debt.
Then, it is determined that the liquidation value of your assets is $5,000 and your excess income $125 per month. We would need to multiply $125 x 48 months = $6,000.
This means that your cash offer would need to be at least $11,000 ($5,000 + $6,000). If the IRS agreed to this offer you would be able to settle your $75,000 tax debt for $11,000.
Short Term Deferred Offer
The $11,000 cash offer seems like a pretty good deal, but many times people just don’t have that kind of cash lying around. If you do, you are going to save a lot of money. If you don’t you can still reduce your tax debt by making payments over a two year period. He’s how that works:
We still take the liquidation value of your assets, and add it to your excess income of $125 per month. But if you want an extended plan you are required to multiply your excess monthly income by 60. This would mean that the total amount paid would be $5,000 (liquidation amount) plus $7,500 ($125 x 60), for a total amount paid of $12,500.
You would be permitted to pay that back over 24 months – so the monthly payment to the IRS would be $520.83 ($12,500/24).
3. Deal with Your Tax Debt in a Chapter 13 Bankruptcy
If you have other debt problems in addition to your IRS tax debt a good way to deal with your tax debt is through a chapter 13 bankruptcy. In a chapter 13 bankruptcy you will be able to eliminate much of the interest and penalties that may have accrued on your tax debt.
Further, in a chapter 13 case you are required to propose a plan to your creditors as to what amount you will be paying. However, in chapter 13 not all creditors are created equally. Most tax debts are given “priority” status – meaning that they will be paid before most other debts.
In most cases you will be required to pay all of your tax debt through your chapter 13 plan. Most chapter 13 plans last 36 or 60 months. So long as you make your monthly payment to the bankruptcy court at the end of your bankruptcy any other debts owed to credit card companies, medical bills, personal loans, etc. will be eliminated.
Chapter 13 also has a very powerful tool known as the “Automatic Stay”. As soon as your bankruptcy case is filed with the court an order will be entered that stops all of your creditors from continuing to try and collect from you. This includes the IRS. Once you have filed for bankruptcy protection the IRS cannot move forward with trying to levy your bank account or garnishment your wages.
4. Eliminate Your Tax Debt in a Chapter 7 Bankruptcy
Like chapter 13, chapter 7 bankruptcy will stop the IRS from garnishing your paycheck or levying your bank account. However a chapter 7 bankruptcy is much shorter (5 months) and there is no plan proposed your creditors.
So while a chapter 7 will stop the IRS for a period of time, it will be able to pick back up with collections after your chapter 7 case is over.
However, contrary to what a lot of people believe, some taxes can be discharged (eliminated) in a chapter 7 bankruptcy. In order for tax debt to go away it must meet the following criteria:
- The Tax Debt Must be at Least Three Years Old. It is important to understand that the three year period starts to run when the tax first became due. Typically taxes are due on April 15th of the following year. For example, taxes owed for 2015 typically become due on April 15th, 2016. This would mean that the three year period would start April 16, 2016. However, if you obtained an extension to October 15, 2016, that is when the three year period would start, not in April.
- Two Years Since the Tax Return Was Filed. It must have been at least two years since the tax return was filed for the year you are trying to discharge. Note, if the IRS filed a substitute return on your behalf this will likely not count as a “filed return” for purposes of obtaining a chapter 7 discharge of the tax debt.
- 240 Days Since the Tax Was Assessed. It must have been at least 240 days since the tax was assessed.
Any IRS tax debts that do not meet this criteria will not be discharged in your chapter 7 bankruptcy case and you will be required to make arrangements for payment or run the risk of bank levy or wage garnishment.
You Have Options for Dealing with Your Tax Debt
Tax debt can be scary. The IRS has a reputation of aggressively pursuing delinquent taxes. However it is important to understand that you have options on how to deal with your tax debt. Whether it be through an installment agreement, an offer in compromise, or bankruptcy you do not need to let delinquent taxes ruin your life.
But you do need to take that first step and act. Call us for a free consultation at (480) 420-4028 or email me at firstname.lastname@example.org.
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